The Chancellor of the Exchequer has entered a bizarre dispute with a man who runs his car on old chip pan oil, and claims it is the fuel of the future.

The Chancellor of the Exchequer has entered a bizarre dispute with a man who runs his car on old chip pan oil, and claims it is the fuel of the future.

Martin Steele has discovered how to manufacture a new form of diesel from the oil and runs his Volvo estate on it.

But he has been angered to find the Treasury wants to levy nearly 50p a litre in fuel duty on the brew made in his Manchester back garden, the same as standard diesel, although his "bio-diesel" is acknowledged as a green alternative.

Now Gordon Brown is considering a special tax reduction for the fuel and on Wednesday his officials will meet Britain's handful of bio-diesel manufacturers.

There are just five - including Mr Steele - and they are demanding Mr Brown cuts tax on bio-diesel by a minimum 15p. That would give a fillip to the nascent industry and lead to the fuel being sold at petrol stations for as little as 40p a litre.

Proponents of the new fuel, made from recycled vegetable oil, claim it is carbon neutral because it absorbs as much of the greenhouse gas carbon dioxide as it produces. Nor does it rely on dwindling, underground oil reserves because the fuel is a by-product of crops such as oil seed rape.

Greenpeace has just lodged an order for 1,000 litres of fuel from a firm called Ebony Solutions, the only commercial manufacturer of bio-diesel in the UK.

The firm, based in Cheshire, produces 20,000 litres a week of bio-diesel by recycling vegetable oil donated by Sharwood's, the food manufacturer. The oil is left over from its mass production of its popular range of poppadoms. Mr Steele's oil comes from more humble origins, his local chippy and kebab shops, who give it free.

But he is not fussy about the source of his car's propulsion, merely evangelistic about its benefits. A sign in large yellow letters in the car's rear windscreen proclaims: "This car runs on fuel made from recycled vegetable oil".

Mr Steele says: "There is an enormous reservoir of waste vegetable oil out there. I make my fuel from waste oils taken from canteen refectories, chip shops and other fast-food outlets such as kebab bars."

Mr Steele became aware of bio-diesel after watching an item on alternative fuels on the children's television programme Newsround.

He began experimenting in his mother's garage before building a "catalytic cracker" in his backyard - a sort of large vat - in which he converts the vegetable oil into diesel. In the two years since he perfected his technique, his car has travelled 18,000 miles on used chip pan oil.

Representatives of the nascent bio-diesel industry will meet Stephen Timms, the Financial Secretary to the Treasury, on Wednesday to stake their case for a reduction in tax.

They will try to persuade the Government that a tax reduction will make the fuel attractive to commercial manufact- urers while helping to end the West's reliance on Opec's oil-pricing cartel. At present they pay 48.8p per litre.

It could also boost Britain's farming industry six weeks after farmers and road hauliers brought the country to its knees by blocking oil depots.

Estimates show 5 per cent of Britain's diesel could be manufactured in the UK through vegetable oil crops such as rape seed, providing a huge financial benefit to farmers. Terry de Winne, a 60-year-old hovercraft engineer, is also making bio-diesel at his workshop in Bangor in Northern Ireland. He began experimenting with alternative fuels after receiving a Millennium Commission grant to investigate sustainable forms of energy for transport. What he came up with is bio-diesel.

"It is the only viable, available and sustainable transport fuel," he says. He hopes to set up four large scale bio-diesel plants in Northern Ireland but needs the Chancellor to bring down tax to make it economically attractive.

A Treasury spokeswoman confirmed that Mr Brown is reviewing the level of taxation on bio-fuels in the run-up tohis pre-budget report due next month, and the Department for the Environment is examining its environmental benefits.